First round of president ial elections in france. Been ringingua has as the news throughout the weekend. We see her in paris. I watched the special yesterday. The question i came back to was how could we get to a world where the two established parties in france did not even make it to the second round . Francine this is significant. There will be a lot of introspection and navelgazing today from the candidates who did not make it. There are two lines of thought. First is that france is ready to reform. They want growth and a more market friendly economy. That is why they voted for a 39yearold the wants to shake things up but is not too scary. How does that explain 40 of the votes going to extreme candidates, Marine Le Pen and jeanluc melenchon. There were four candidates. You can see the old school, the republicans almost had a clear win until january when we had Francois Fillon immersed in a scandal about paying his family without work being done. Macron won because he was the most palatable. Citizens were not really convinced with his project, but it was the favored amongst flawed candidates. David beyond the antiestablishment tone, what affects might this have Going Forward with legislation . Doesnt that make this difficult for either candidate, they will not have a majority in the parliament. Francine that is true. If you look at the markets, it is clear the markets trust the polls. The polls give a clear win to the Emmanuel Macron. 62 forst was around him. What youre talking about is what markets, the sophisticated markets will be looking at. How does he govern . If you look at macrons movement, it is not an established Political Party. At the moment he does not have establishment in parliament. We go to the legislative elections on june 11 and june 18. We are talking about how he can position himself to build a cabinet if he becomes president so he can govern. He can either govern alone, unlikely. Or it will have to be some kind of Coalition Never before seen in france. Jonathan how does the National Front continue to build on this movement that has gained significant omentum . Would it be to assume that this goes away after this . Francine it is unlikely to go away. We have Marine Le Pen not doing so great in the legislative elections. It depends on the campaign. It seems at the moment before politicalr five main parties will try to get votes for themselves. That means a collision is unlikely. Coalition is unlikely. Thank you for the strong reporting from paris. Alix joining us is david will Steven Wieting and james athey. Do you buy into the risk rally we are seeing today . Good morning. I think the risk rally is just relief. This is a question of pricing out the most extreme option, andh is madame le pen starting to look at the economic fundamentals, which have been Getting Better and better in the eurozone. Growth is tracking 2. 5 to 3 . Once you take out that Political Risk, it is inevitable we see a risk rally. The most interesting analysis to me is what mr. Macron can achieve without a Political Party behind him, the need for a coalition on a deal by deal basis and being susceptible to the parliamentary elections. That makes the picture less clear for the future of france. Alix across the board, goldman was the only one that was relatively more negative saying a macron victory was already priced in. Describe to us the sequence of events from the short term trend relief rally to the fundamentals justifying a big move into french equities. This is a significant risk that has been diverted. If either of the two extreme candidates had one in the first round, then germany would not have a Good Coalition party. Risk to the eurozone itself would be under greater question. Told calculus. At whole calculus. Discreet, argely be single day. The question begins, how does this affect Economic Growth in the long run . Do we have other political issues that will arise such as the italian elections in 2018. You have to have a longerterm perspective. You take out a significant risk that has been holding back markets. Jonathan what does it say that this question of redenomination risk keeps coming up and is unlikely to go away . It says the same thing it has said throughout the post crisis period. We are still dealing with the Monetary Union that is not fit to purpose. There are red lines in Northern Europe and southern europe. Until one of those groups of nations is prepared to cross that redline, you have a halfway house. Periodically when we start to see stress in the economy or financial markets, they can feed off of each other, and things can look messy in the short term. It is not a surprise that with a partially finished Monetary Union, we get these concerns. Jonathan when you look at the markets this morning, we have a big value already. If you have a longerterm horizon, do you accept this question will keep coming up and there will be volatility over the next several years . That is right. This has persisted for 18 years. If you look at the whole post unrestperiod, there was between 2008 and 2013. It does not need to come back to that extent. Look at italian elections in 2018, which may be a greater risk. This as a catalyst is disappearing. The severity of the stress you are likely to see from Political Risk is likely to go down for the remainder of the year. That will be priced out pretty fast. You have to go to other issues like the ecb. One of my questions is how well do International Markets find relief on this particular issue . Obviously it will be strong in france. The fact that the dollar can settle back, and how do emerging architect unsettled by this risk performed today . David what would you need to see, what indications make you conclude this could be more than a relief rally and longer trend in terms of Economic Growth . I am going to agree with stephen. We have already seen what happens when the u. S. And Federal Reserve started stepping away from the incredibly easy style of Monetary Policy we have become used to. Now that Political Risk has dissipated, markets begin to focus, and i will be focusing on what is next. Withave to look at the ecb growth and inflation where it is. Is their policy appropriate . We would look at the spreads we have been used to on european government assets, and they largely reflected the policy of the ecb and the flow aspect of that as opposed to anything to do with economic fundamentals. Now you get this push and pull. Economy is doing a lot better. If we start to see the ecb step away from easing purchases and start to see them normalize moves inhat means assets and the economy will not necessarily be in the same direction. In the u. S. We have seen higher yields and steeper curves, great for bank stocks, but is that great for the general economy . Alix both of you are sticking with us. Breaking news dealing with a potential merger. Bid forraised their akzonobel. We have learned they will review and consider the revised deal. They rejected it previously in march, saying it did not value the company well. The ceo wanted to look at splitting the company into. Now they will be reviewing it. Inathan coming up, we bring ian bremmer, Eurasia Group founder. Risk rally in europe. You are watching bloomberg. Jonathan we will hear from ecb president mario draghi on thursday. The path to Monetary Policy organization may be quicker than most economists anticipated. Revise guidance as early as june. Wieting,s is steven citi private bank, and james athey averaging asset management. Exiting thisof program, when do you anticipate those tweaks . How important will the political backdrop be . That is a good point. I dont expect the next ecb meeting this week to have a change on policy and Forward Guidance. It gets interesting from june on. How much they are cognizant of the parliamentary elections in france is difficult to say, but between june and september, i expect them to start steering is towardtapering us tapering policy. Jonathan the markets this morning reacting. The prudent action would be to wait for the second round. When you look at inflation data, that is what ecb is going to react to. Are they going to continue to wait . Steven i think the ecb took an approach where they did not argue there was a significant eurozone breakup risk. For them to go further in this direction, i dont think it happens as soon as april. That is timember, to think about how bond purchases are tapered at the end of this year. That will take place around the time of the italian elections. That could be trickier. For the short term performance of markets, this is far out there. For investors to understand you have a tremendous amount of central bank support in markets. This is one of the risks and the region you will have to live with and adjust away from. This will be very important. There is a big valuation gap between stocks and bonds. Bondsmentgrade corporate are among the richest in the world. Way from japan, this is a rich market because of the ecb. Discount. S you see a you have a volatile backdrop in normalizing policy. You do not have a rapid growth rate in the long run for europe. Is in favorion gap of resilient equities relevant to bonds. Alix do you agree with that . If i look at eurodollar, the euro was pretty stable as the dollar was moving at the end of the day. That implies it is held up by the expectation of ecb tapering. Of g10 bonds,cing looking at europe and the u. S. As well, they have struggled to take into account these changes in central bank policies. We have the fed talking about Balance Sheet unwind and the ecb as well. That feels like it should be felt through g10 Government Bonds. You get some protection by owning nominal assets with dividends. When they are yielding 35 basis points at the moment, that feels like a rich asset, which is facing the wrong direction even in centralf change bank policy and this global cyclical upswing. Alix that makes sense. Just ask the bond bears. That trade has not worked out. Do we need the ecb to get more aggressive or any repricing to happen . Monetary policy in the u. S. And eurozone will be asymmetric compared to easing. Balance sheets are not going back to 2008 levels. The whole way the economy works is not going back to 2008. There is no symmetry in putting in place a tightening that would threaten the economy in a serious way. To the extent the Economic Outlook is held hostage to Balance Sheet concerns, those will have to disappear. Central banks will have to hold large amounts of assets for a long time. It is the process through which they discovered how far they can go, and that will create volatility. I dont think you see that that going back to massive bond selloffs to bring the Balance Sheet to a low level. The same thing goes for the ecb where would take much longer. Wieting, thank you for being with us today. James athey of Aberdeen Asset management, you are staying with us. The fallout from the French Election. We go through the results and what they mean for the future of the eurozone. Later, in bremmer will be with us. This is bloomberg. Jonathan markets are in risk on as theter macron emerges political favorite. Joining us is john micklethwait. Great to have you around the table. Lets talk about the significance that almost half of the electorate voted for either the extreme left or extreme right. What is the significance of that . John you have to be careful about declaring this business as usual. A lot of people voted for the extreme right or extreme left. There are still people who will come up to you and say probably they voted for le pen. It is not a hidden thing. Macron is not part of the old system. He has a completely new party. The socialist party with 6 . The two main parties are not part of the runoff. That would be like having a president ial runoff where there was not a republican or democrat in american terms. Jonathan no one was shy about saying they were going to vote for le pen. Point, the fact that these are not mainstream parties, how difficult is it going to be to govern . John macron faces to challenges, which is to win the next bit. You should be surprised if not shocked if brexit happens. Surprised but not shocked if trump wins. This is moving to the shocked level if le pen wins. She would have to win a big chunk of fillon support. Macron does not have a party yet. He has to win seats in the parliament. His answer has always been, i will win, and i will create a party around me. A i will organize the party, and it will work. David it seems the french electorate said we want change, fundamental change. There will not be a majority in parliament. The one clear loser was fillon. Llande. Approval ratings are pathetic. It is the sort of numbers extreme parties used to get and we never talked about them on programs like this. It is equivalent to democrats in Congress Getting four seats. It is hard to imagine a world where the main parties still dominate the assembly, and that will be the problem for macron. He has to get some new people in. The problem with getting new people is you always get a few oddballs because you dont have time to vet them. Those things happen. David in a year, he has twice as many people as in the socialist party. That is not bad. They tend not to be professional politicians. He has a wave of feelgood behind him. You would imagine in the equivalence of manhattan and paris, everyone is worldly. He has to find people, deputies s who will support his program. Jonathan when we discuss the future of europe, we usually discuss an important alliance. If you get scholz in germany going with macron, what does that alliance look like for europe . , wehe italians and spanish have the italian finance minister later today. The italians have problems in the financial system. The spanish are doing generally better. Europe has always done better france and germany, and the british are doing in the backseat. If you take him and macron, who is proeurope, you have the possibility of the eurozone on only integrating. Is francois this fillon, that was one of his great dreams. He would reform france, unite with germany, and you would have the eurozone that started to integrate and work well. You can only make the eurozone work because you dont need to put things to referendums in the same way you do if you try to put things through the European Union. Jonathan thank you. John micklethwait running us in new york city. Group founder, he is with us this morning. It is buy risk in the market. The dax hits an alltime high. Core Government Bonds on offer. E. Easuries up fiv you are watching bloomberg daybreak. I am jonathan ferro. All 19 Industry Groups pushing higher. This is what the bond market looks like. Up nine basis points. Points. Es up six basis French Market rally brings that spread in. Weakerr euro and japanese yen capturing that risk on sentiment. Many believe the nightmare risk will not materialize in the markets. France. Keep with macron and le pen won the first onnd, setting up a runoff may 7. Come to free the from our arrogant. Oliticians and policies i the candidate of the people. Rona snap poll shows mac would be le pen beat le pen. May isu. K. , theresa making a big for labour party voters. Platform calls for cap on Household Electricity prices. Toughite house is talking about including money for its controversial Mexican Border wall in a must past spending bill this week. White house officials said they dont know if President Trump would sign a bill without money for the wall. Democrats say they wont go for that. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. This is bloomberg. David we are told we will have a tax reform proposal, a new health care bill, and certainly no whether the government will shut down before the end of the week. We turn to our chief washington correspondent Kevin Cirilli. Take us through it. I am told that Health Care Policy is still going to thistially help shape final week before President Trumps of his first 100 days. The Freedom Caucus will have a meeting to begin seeing where they stand and whether or not they have the deal. David we all hear this 100 days thing is somewhat artificial although the president himself put out a contract with the american voter. How much of the feeling pressure right now . This is a report card of sorts. From a policy standpoint, it comes at a time in which polls indicate this president has historically low approval ratings. Hesident trump said friday will unveil a tax reform plan on wednesday, then Administration Officials and folks on capitol hill say we are not ready yet to unveil a full tax policy proposal plan. We could see the foundation of a tax plan on wednesday, but this is clearly getting to the administration. They want to put out momentum saturday, the 100th day in office come the same day as the white house correspondents dinner. David i dont remember a time when a president has said something this definitive and his staff was caught unaware. Budget, a a skinny twopage summary . Lawmakers have to pass some type of week this comes the same as the house release the plan to walk back to doddfrank. Then we hear just hours later that theres going to be a tax plan. Bit of stepping over themsel